Zero-rating, social welfare and net neutrality

Abstract

This paper studies zero-rating, an emerging business practice consisting in a mobile internet service provider (ISP) excluding the data generated by certain content providers (CPs) from its consumers' monthly data cap. Being at odds with the principle of net neutrality, these arrangements have recently attracted regulatory scrutiny all over the word. I analyze zero-rating incentives of a monopolistic ISP facing a capacity constraint in a two-sided market where consumption provides utility for consumers as well as advertising revenue for CPs. Focusing on a market with two CPs competing with each other and all other content which is never zero-rated, I identify parameter regions in which zero, one or two CPs are zero-rated. There is a trade-off for consumers: on the one hand they enjoy utility from increased consumption, on the other hand the resulting congestion creates a negative externality. I show that both types of zero-rating programs currently offered by ISPs can be welfare increasing or decreasing depending on market conditions.